INTERNATIONAL POLICY ANALYSIS

On the Way to a Fiscal or a Stability Union?

The Plans for a »Genuine« Economic and Monetary Union

BJÖRN HACKERDecember 2013

Besides acute crisis management issues, the EU started a process of identifying possible reform steps to deepen the integration of the Economic and Monetary Union (EMU) in 2011. This engagement concerning the systemic character and risks of the Eurozone crisis began relatively late.

A mapping of missing elements in the Maastricht architecture of EMU done by Herman van Rompuy, José Manuel Barroso, Jean-Claude Juncker and Mario Draghi in 2012 presented four comprehensive building blocks that would have to be imple-mented in order to realise their »vision for a stable and prosperous EMU«.

These ideas for expanding the today’s monetary union to a fiscal union have been refined by own plans of the European Parliament and the European Commission. However, their scope has been stripped-down intensively by the heads of state and government at their European Council summit in December 2012.

Since then, the reform debate on establishing a »Genuine Economic and Monetary Union« transformed into a conflict between two groups of Member States gathering around France on one side and Germany on the other. The latter camp seems to have gained the lead with its »stability approach« against all kinds of mutual liability, financial rebalancing and social coherence. Elements still under consideration for 2014 are a Banking Union, stronger economic policy coordination, contractual agreements between Member States and the EU, a fiscal capacity, the democratic legitimation and the social dimension of EMU.

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Content

1. Introduction: The Euro-crisis as the Background of the EMU Reform Debate . . . . . 2

2. The EU’s Draft Reforms: Presentation and Critique . . . . . . . . . . . . . . . . . . . . . . . . . . 22.1 The First Quadriga Report and Its Political Reception . . . . . . . . . . . . . . . . . . . . . . . . 2

2.2 First Amendments at the October Summit 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2.3 The Resolution of the European Parliament . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

2.4 Blueprint of the European Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2.5 Quadriga Report II and Its Compression at the December Summit 2012 . . . . . . . . . 6

3. The Reform Debate after Its Reorientation in December 2012. . . . . . . . . . . . . . . . . 73.1 Preparatory Work by the European Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

3.2 New Differences concerning Banking Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

3.3 Franco-German Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3.4 Disappointment Arising from the June Summit 2013 . . . . . . . . . . . . . . . . . . . . . . . . 10

3.5 Postponements prior to the December Summit 2013 . . . . . . . . . . . . . . . . . . . . . . . . 11

4. Critical Evaluation of the Reform Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124.1 Banking Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

4.2 Economic-policy Coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

4.3 Contractual Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

4.4 Fiscal Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

4.5 Democratic Legitimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

4.6 Social dimension of EMU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

5. Starting Out like a Tiger, Ending Up as a Bedside Rug: The »Genuine« EMU Will Not Be a Fiscal Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

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1. Introduction: The Euro-crisis as the Background of the EMU Reform Debate

For several months, the abbreviation »GMU« has haunted

the debates at conferences and meetings on the crisis of

the European Monetary Union (EMU). The EU has never

lacked acronyms and the Eurozone crisis has brought a

rich harvest of new coinages, such as EFSF (European

Financial Stability Facility), ESM (European Stability Mech-

anism), MOU (Memorandum of Understanding) and

OMT (Outright Monetary Transactions). Now we have

GMU, short for »Genuine Monetary Union«. Alterna-

tives offered by the dictionary for »genuine« would be

»straightforward«, »authentic« or, above all, »serious«,

but they would have had ironic undertones. But what is

a »genuine« monetary union?

At the latest with the spread of the Eurozone crisis to

Italy and Spain, whose refinancing costs skyrocketed

on the announcement of a »haircut« in Greece from

which the private sector did not escape unscathed, the

conviction began to grow that Europe would not be

able to cope with the crisis solely by readjusting existing

governance instruments. The governments of the euro

Member States, at their meeting on 26 October 2011,

asked Herman van Rompuy, President of the European

Commission and chair of the Eurogroup, to work out

possible steps to deepen integration in the Monetary Un-

ion. The focus was to be on closer economic convergence

and improved fiscal discipline. Limited Treaty changes

were also to be discussed concerning the deepening of

EMU (Euro Summit 2011: 10).

This belated realisation pointed, first, to the systemic

character of EMU’s crisis, which at this point had been

simmering for two years. Previously, the only take on the

crisis officially recognised by the EU institutions had been

the transgressions of individual Member States against

European regulations and the latters’ ineffectiveness. Dis-

cerning fundamental shortcomings in the architecture of

the Monetary Union and a desire to rectify them did not,

however, lead to the abandonment of the crisis-mode

adopted in 2010, characterised by solidarity based on

credit, strictly conditional on austerity measures. Further-

more, the faith of the heads of state and government

in the European Council in tightening up the existing

framework of budgetary controls through a stricter inter-

pretation of the Stability and Growth Pact, underpinned

by sanctions remained unshaken. This is reflected, on

one hand, in the continuing unchanged demands made

to crisis-countries Cyprus, Greece, Ireland, Portugal and

Spain to lower wage costs, cut social services and imple-

ment privatisation (Busch et al. 2012). On the other hand,

the growing tangle of new instruments, procedures and

institutions of European economic governance indicates

the inadequacy of piecemeal tinkering with the existing

architecture of the euro zone, in particular in terms of a

thematic orientation towards limiting public debt – based

on an understanding of the current situation as a »sover-

eign debt crisis« – by means of the European Semester,

the Six-Pack, the Two-Pack, the Euro-Plus Pact and the

Fiscal Compact (Hacker 2013a; Hacker 2013b).

Only the ever more apparent failure of the pure austerity

course, with its economic errors and social upheavals, but

also the attendant surge in political protest, which found

an important voice with the election of François Hollande

as President of France, led to an intensification of work

on plans to complete the existing EMU as a »genuine«

monetary union in 2012.

In Section 2 we present a historical outline of the rel-

evant events, together with the plans presented and

discussed up to the end of 2012. In Section 3 we pres-

ent the changed emphases of the reform debates in

2013. Six central building blocks from the discourse on

a »genuine« EMU are considered critically in Section 4,

before concluding in Section 5 with a discussion of the

lines of conflict and prospects for moving forward.

2. The EU’s Draft Reforms: Presentation and Critique

2.1 The First Quadriga Report and Its Political Reception

At the meeting of the European Council on 28–29 June

2012 Herman van Rompuy presented his first report on

deepening EMU integration, in whose drafting he had

consulted, besides Commission President José Manuel

Barroso and Chair of the Eurogroup Jean-Claude Juncker,

the President of the European Central Bank Mario Draghi.

»The report proposes to move, over the next decade, to-

wards a stronger EMU architecture, based on integrated

frameworks for the financial sector, for budgetary mat-

ters and for economic policy« (Van Rompuy 2012a: 1).

The four presidents identify four central building blocks

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in the architecture of the euro zone that would have to

be implemented in order to realise their »vision for a

stable and prosperous EMU«:

(i) An integrated financial framework, in other words: a

banking union with mandates for European supervision

and for restructuring and depositing guarantees safe-

guarded by the European Stability Mechanism (ESM).

(ii) An integrated budgetary framework that ties strin-

gent state budgetary policy with joint debt management,

through the emission of common bonds. Explicitly men-

tioned is the possible establishment of a debt repayment

fund (Van Rompuy 2012a: 6). Complete fiscal union

implies the development of a fiscal capacity to manage

economic interdependencies, for example through a joint

budget.

(iii) An integrated economic policy framework, to

promote sustainable growth, employment and compet-

itiveness on the basis of the European Semester and

the Euro-Plus Pact, in particular with regard to labour

mobility and tax coordination.

(iv) Strengthening the democratic legitimacy and ac-

countability of the new joint decision-making mecha-

nisms in the areas of finance and the economy.

The Quadriga Report met with mixed reactions, but on

a number of key points it deviates from the currently

dominant crisis management. Thus, a banking union is

proposed that would, by means of the ESM, be propped

up by a safety net. In the – probable – event of restruc-

turings and liquidations of financial institutions, it would

have at its disposal the mechanism introduced to supply

states in refinancing difficulties with emergency loans

and guarantees. The principle of Community liability in-

troduced de facto in circumvention of the »No bailout«

clause of Article 25 of the EU Treaty is highly contentious;

even more so its extension to private-sector banks. In

view of Spain’s banking problems the possibility of indi-

rect bank recapitalisation via the EFSF/ESM was agreed

at the June 2012 euro-state summit against German

opposition and only under strong pressure from Italy and

Spain (Euro Summit 2012).

With regard to the integrated budgetary framework the

four presidents by no means talk only of strengthened

budgetary controls, but also of the need for a fiscal

union, with the option of joint issuing of debt securi-

ties. Coordination and convergence are to be promoted

explicitly beyond budgetary concerns in a number of

economic-policy areas with a view to reducing imbal-

ances. The relatively clear plea for a higher degree of

European responsibility and transnational solidarity is

complemented by a reference to improved integration of

the European and national parliaments.

The proposals for completing EMU by increasing Com-

munitisation made here for the first time by a powerful,

albeit informal committee must have annoyed, to say

the least, states which back the austerity policy propa-

gated by the German government. Thus Finland’s finance

minister Jutta Urpilainen positioned herself against any

kind of Communitisation shortly after the summit at the

end of June: »We cannot agree to joint responsibility

for the debts, national economies and risks of other

countries« (quoted on FAZ.net, 6 July 2012). German

Chancellor Angela Merkel expressed a similar view in a

government statement at the EU summit: »I fear that the

summit will once again talk too much about all kinds of

ideas for possible joint liability, and much too little about

improved controls and structural measures« (quoted

in Die Zeit Online, 27 June 2012). It is not the aim of

these governments to establish a fiscal union, but rather

a »stability union«, with a view to establishing central

budgetary control, including the right to intervene in

national budgets.

Accordingly, the conclusions of the European Council

speak surprisingly openly about »differences of opinion«

that became evident in the debate on the Quadriga Re-

port. This was merely taken note of, however, and the

four presidents were asked to work out their proposals

in more detail by the end of 2012 (European Council

2012a: 3).

2.2 First Amendments at the October Summit 2012

At the meeting of the European Council in October 2012

Herman van Rompuy laid out an Interim Report that fur-

ther developed the building blocks of a »genuine« EMU

presented in June against the background of individual

talks with the governments of all Member States, as well

as the President of the European Parliament. The inte-

grated financial framework by means of a banking union

was retained in every particular; it was emphasised that

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»the establishment of an integrated financial framework

is necessary for the achievement of a genuine economic

and monetary union« (Van Rompuy 2012b: 2). It was also

made clear, however, that at the same time there must

be »more effective fiscal discipline« because otherwise

taking over banking sector risk could give rise to negative

incentives (Van Rompuy 2012b: 3). In the area of an in-

tegrated budgetary framework the Interim Report refers,

first, to the innovations of the Six-Pack and the Two-Pack,

either already adopted or in the process of legislation.

The latter plan on the ex-ante coordination of national

budget plans is already a crucial prerequisite for the in-

troduction of a form of Community bond. There was also

further clarification of the idea of a fiscal capacity for

the euro zone. While a symmetric shock that affects all

countries at the same time should be tackled by means

of monetary-policy measures, for an asymmetric shock a

central budget is proposed with which »a form of limited

fiscal solidarity« would be enabled through »elements

of fiscal risk sharing«. The difference with the ESM is

worked out clearly: »The European Stability Mechanism is

a crisis management instrument and was not designed to

perform such a shock absorption function« (Van Rompuy

2012b: 5). For the first time, the idea of bilateral contrac-

tual agreements between the EU and individual Member

States on structural reforms is invoked, including prior

coordination and central »macro-prudential« supervision

by Brussels. In order to enhance democratic legitimacy

reference is made to the possibility of an interparliamen-

tary conference to improve cooperation between the

European and national parliaments, as proposed by the

Fiscal Compact (see Schäfer and Schulz 2013).

The October summit took note of the Interim Report and

asked the four presidents to present a detailed roadmap

at the December summit, complete with deadlines

for the implementation of individual elements of the

»genuine« EMU. In the conclusions some aspects of

the Interim Report are repeated, albeit with reservations

(European Council 2012b: 6ff). Thus banking union is not

classified as a non plus ultra of any further integration.

Instead, mention is made of prudence with regard to the

allocation of competences for supervision, restructuring

and liquidation between the supranational and national

levels. The heads of state and government refer in great

detail to the instruments of budgetary policy supervision,

the Six- and the Two-Pack, as well as the Fiscal Compact,

whereas they mention fiscal capacity only in passing as a

mechanism to be explored. Bilateral Treaty partnerships

and ex-ante coordination of economic-policy reforms

were touched on briefly, whereas the forms of joint

debt management mentioned in the Interim Report,

including the issuance of Eurobonds and so on, were

not addressed.

2.3 The Resolution of the European Parliament

At the end of November 2012 the European Parliament

laid out its own plans on the future of EMU. The Reso-

lution of 20 November (based on the Thyssen Report),

adopted by a large majority, called for a leap in the

direction of a federal Europe. For the Parliament, this in-

cludes enabling a banking, fiscal, economic and political

union. The MEPs criticised the fact that the President of

the Parliament was not invited to the meetings of the

Van Rompuy group and called for more comprehensive

accountability and a strengthening of Parliamentary

control and consultation rights. They also mentioned

closer involvement of national parliaments if more rights

were to be transferred to the European level within the

framework of the new economic governance (European

Parliament 2012).

With regard to banking union the MEPs called for the

establishment of an integrated oversight mechanism and

the rapid implementation of new directives on deposit

guarantees and on the restructuring and liquidation of

financial institutions. The latter point involved »open[ing]

up in the medium-term the creation of a single European

recovery and resolution regime« (European Parliament

2012: Annex). As part of a fiscal union the European

Parliament proposed a gradual rollover of excessive

debt into a redemption fund and listed detailed targets

for a European Social Pact, such as a European youth

guarantee to combat youth unemployment and the im-

plementation of a social protocol. With regard to possible

institutional changes the MEPs emphasised that even

a framework for closer coordination for the Monetary

Union would have to be based on a Treaty design for the

EU as a whole: »The currency of the Union is the euro

and its parliament is the European Parliament« (European

Parliament 2012: Annex).

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2.4 Blueprint of the European Commission

On 28 November 2012 the European Commission pre-

sented a »blueprint for a deep and genuine economic

and monetary union« (the so-called »Blueprint«).

Building on a balanced analysis of the shortcomings of

the current EMU architecture and evaluating previous

measures as unsatisfactory for overcoming the crisis, it

proposed short-, medium- and long-term steps to enable

a political union (European Commission 2012a: 13ff):

(i) Within the next 6–18 months the banking union

should be realised, including an integrated supervisory

and resolution mechanism. In order to improve economic-

policy governance an instrument for convergence and

competitiveness should be introduced that provides for

direct contractual arrangements on the implementation

of structural reforms between the EU and individual

Member States.

(ii) Within the next 18 months to five years further budg-

etary and fiscal-policy coordination by means of a proper

fiscal capacity for the euro zone, a redemption fund and

common issuance of short-term government debt, so-

called eurobills, should be achieved.

(iii) For the period beyond five years, autonomous euro

area budgeting should be established for EMU that can

absorb economic shocks. Furthermore, the fiscal-policy

conditions for the common issuance of public debt, so-

called Eurobonds, should be put in place.

Table 1: A blueprint for a deep and genuine EMU as presented by the European Commission

A blueprint for a deep and genuine EMU Launching a European debateSecondary

lawTreaty

change

ALL

ALO

NG

TH

E PR

OC

ESS SH

ORT

TER

M

With

in t

he n

ext

18 m

onth

s

1. Full implementation of European Semester and Six-pack and quick agreement on and implementation of Two-pack

2. Banking Union: Financial regulation and supervision: quick agreement on proposals for a Single Rulebook and Single Supervisory Mechanism

3. Banking Union: Single Resolution Mechanism

4. Quick decision on the next Multi-annual Financial Framework

5. Ex-ante coordination of major reforms and the creation of a Convergence and Competitiveness Instrument (CCI)

6. Promoting investment in the Euro Area in line with the Stability and Growth Pact

7. External representation of the Euro Area

MED

IUM

TER

M

18 m

onth

s to

5 y

ears 1. Further reinforcement of budgetary and economic integration

2. Proper fiscal capacity for the Euro Area building on the CCI

3. Redemption fund

4. Eurobills

LON

GER

TE

RM

Beyo

nd 5

Ye

ars 1. Full Banking Union

2. Full fiscal and economic union

Political union: Commensurate progress on democratic legitimacy and accountability

Source: European Commission 2012b.

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The Commission argues that the short-term measures

can be implemented within the framework of secondary

law (see Table 1), whereas for the medium and long

term, amendments to the Treaty are necessary. It also

offers proposals to strengthen democratic legitimacy and

governance in EMU (European Commission 2012a: 40ff):

Thus the European Parliament should be more closely

involved in the European Semester and the establishment

of the main features of the economic and employment

policy guidelines.

In the wake of a Treaty amendment the economic and

employment policy guidelines could be transferred to

the regular legislative procedure, and a new competence

could be adopted for reviewing national budgetary plans

in accordance with European obligations in the co-deci-

sion procedure.

Institutional amendments should be striven for in the

direction of a segregation of euro members within the

three EU institutions, for example, by means of a deputy

commissioner responsible for the economy, finances and

the euro; an expansion of the functions of the Eurogroup

in a council for the euro area; and a Euro Committee

in the European Parliament. The European Commission

recognises the importance of cooperation with the

European Parliament and national parliaments, but it

considers an interparliamentary assembly, as proposed

in the fiscal treaty, to be inappropriate for increasing

democratic legitimacy.

2.5 Quadriga Report II and Its Compression at the December Summit 2012

Van Rompuy presented the Report, revised with Barroso,

Juncker and Draghi and taking into account direct con-

sultations with the Member States, at the meeting of

the European Council on 13–14 December 2012 (Van

Rompuy 2012c). In it, in accordance with what the report

was supposed to address, a time-bound three-stage plan

is proposed for realising a »genuine« EMU, with the

following main components:

(i) By the end of 2013 the planned banking union

should be largely in place, with an integrated oversight

mechanism, rules for deposit guarantees and the option

of direct bank capital recapitalisations via the ESM. A

framework should be established for the prior coordina-

tion of economic policy reforms envisaged in the Fiscal

Compact.

(ii) By the end of 2014 the banking union should be

completed with a mechanism and authority for winding

up banks and a new instrument for implementing struc-

tural reforms should be introduced with contractual ar-

rangements between the EU and the individual Member

States. Temporary financial support should be available

for the Member States from a new common budget to

enable compliance with adjustment measures.

(iii) After 2014 a fiscal capacity should be established in

EMU able to absorb country-specific economic shocks

by means of an insurance system. Furthermore, the co-

ordination of economic policies between the Member

States should be improved, in particular in the areas of

employment and taxation.

In contrast to what might be supposed concerning these

far-reaching proposals, the EU’s December summit ended

disappointingly, in particular given the high expectations.

The fanfared »Roadmap for the completion of EMU«

consists of little more than declarations of intent. Only in

the area of banking union are the conclusions concrete

and call – by reaffirming the conclusions of the October

summit – , after agreement has been reached on an in-

tegrated supervisory mechanism in the ECOFIN Council,

for swiftly bringing about agreements on proposals for

directives on the restructuring and liquidation of banks,

on one hand (by the end of March 2013) and for deposit

guarantee systems (before June 2013), on the other

(European Council 2012c: 3f).

Consensus was not reached on all topics arising from

banking union, but the presidents of the European Coun-

cil and the European Commission were again assigned

the task of review. By the June 2013 summit, after con-

sultations with the Member States, a concrete roadmap

was to be worked out with deadlines, presenting the

options for shaping European policy in four areas:

(i) ex-ante coordination of Member States’ major eco-

nomic-policy reform plans;

(ii) EMU’s social dimension, including social dialogue;

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(iii) direct contractual arrangements on competitiveness

and growth between the EU and individual Member

States;

(iv) solidarity mechanisms to support contractual

arrangements.

Furthermore, the euro Member States wanted to reach

agreement on rules of procedure for their meetings,

introduced by the Fiscal Treaty, by the March summit of

2013. The European Parliament and the national parlia-

ments were called upon to give impetus to the interpar-

liamentary conference also mentioned in the Fiscal Treaty,

at which EMU-related issues would be discussed. To allay

fears of some non-members about an irreversible evolu-

tion of a core architecture of the euro zone with its own

set of instruments and institutional structures, the Heads

of State and Government emphasise that »[t]he process

of completing EMU will build on the EU’s institutional and

legal framework« (European Council 2012c: 2).

Even if the three reports presented at the end of 2012

differ in the extent to which they deepen EMU, they each

develop and deepen the four building blocks of the first

Quadriga Report of June 2012. However, the clear com-

mitment to the medium-term establishment of a fiscal

union with elements of common debt management, the

establishment of a fiscal capacity for the Monetary Union

as the preliminary stage of a euro zone budget and the

first steps towards a political union were scrapped at

the summit meeting by a group of critical states around

Germany (Bloomberg, 6 December 2012). Apart from

the commitment to establish a banking union and the

usual emphasis on implementing the new budgetary

policy guidelines this involves a reorientation of the plans

being pursued by the European Council. All that remains

is the aspects of ex-ante coordination, direct contractual

arrangements and appropriate incentive mechanisms

mentioned fleetingly for the short term and as a means

to an end by the abovementioned reports. Intended as

preliminary stages of close fiscal and economic-policy

integration they were re-interpreted by the December

summit for its own purposes. This is a considerable set-

back for the scope of possible reforms of EMU (Rodrigues

2012: 1f).

The social dimension of EMU integrated in the con-

clusions at the instigation of the French government

represents a completely new aspect of the debate and

must be regarded in light of the urgent political problem

of higher youth unemployment rates. The references

in EU documents from this time on to maintaining the

social market economy, the preservation of the European

social model and the need for a »differentiated, growth-

friendly« budgetary policy (European Council 2012c: 1)

are the sole evidence of a new standpoint in the EMU

reform process, which initially was expected to be com-

prehensive, but by the end of 2012 was trimmed back.

3. The Reform Debate after Its Reorientation in December 2012

3.1 Preparatory Work by the European Commission

On 20 March 2013 the European Commission presented

two Communications on three of the four constituent

units of the conclusions of the December summit of

2012; they can be considered to be the precursors of

concrete legal acts.

The »Communication on the ex-ante coordination of

plans for major economic policy reforms« (European

Commission 2013a) concentrates on the abovemen-

tioned first point from the December Conclusions. On

the basis of Article 121 (1) and Article 12 of the Fiscal

Treaty major economic policy reforms are defined as an

area of general interest in EMU and in future are to

be subject to ex-ante coordination, binding for all euro

Member States. This is relevant in particular in the areas

of trade / competition, financial markets and political

economy. The coordination process is to be steered via

the European Semester, in terms of which the Member

States are to submit plans for major economic reforms

with the national reform plans of the European Semes-

ter to the Commission. The Commission is supposed to

evaluate whether effects are to be expected on other

Member States or on the euro zone as a whole from the

reforms; whether each member state is strengthening its

competitiveness with them; and whether they have im-

plications for the EU’s social dimension. The Commission

is to make proposals for improvement and the Council is

to make recommendations for amendments, to be issued

to the Member States regularly within the framework of

the European Semester.

In the Communication on a Convergence and Com-

petitiveness Instrument (European Commission 2013b)

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points 3 and 4 of the December conclusions are dealt

with together. Accordingly, EU bodies are regularly to

negotiate direct agreements with each EMU member

state, in which the relevant state will commit itself to the

manner and time frame in which it will implement the

country-specific recommendations from the European

Semester, including the procedure against excessive

economic imbalances. The European Commission is

to work out the agreement on the basis of its country

monitoring and negotiate it with the relevant member

state, while the Council is to conclude the agreement.

This programme for structural reforms is to be endorsed

by the relevant member state’s parliament. Financial

support will be made available to Member States as an

incentive to carry out implementation in accordance with

the agreement, funded by a new earmarked source in

the EU budget, which is not supposed to be a component

of the Multi-annual Financial Framework. States’ level

of payments into this »solidarity mechanism« would be

oriented towards national GDP or paid at a flat rate in

accordance with the agreement.

On 14–15 March 2013 Herman van Rompuy informed

the European Council about the current status of work

on the roadmap for a »genuine« EMU. The heads of

state and government were emphatic concerning the

conditionality of any deepening of integration: »Any

new steps towards strengthening economic governance

will need to be accompanied by further steps towards

stronger legitimacy and accountability« (European Coun-

cil 2013a: 9).

3.2 New Differences concerning Banking Union

The March summit urged rapid agreement on an in-

tegrated oversight mechanism (Single Supervisory

Mechanism or SSM) and, building on that, by summer

2013 agreement on a directive for the restructuring

and resolution of banks, as well as on a directive on

deposit insurance. The Commission also announced

the outline of a legislative proposal for an integrated

resolution mechanism (Single Resolution Mechanism or

SRM), which was to be adopted within the current term

of office of the European Parliament. It is intended to

protect tax payers and to be based on contributions from

the financial sector (European Council 2013a: 10). On

19 March 2013 an agreement was reached between

the Council and the European Parliament on integrated

banking supervision. This is to be established by March

2014 under the umbrella of the ECB and to supervise

institutions with balance sheets worth more than 30 bil-

lion euros or more than 20 per cent of a country’s eco-

nomic output, as well as all banks that in future draw

funds from the ESM. The joint supervision by the ECB is

a condition of the ESM recapitalising banks (European

Commission 2013c). Around 150 banks are thus to be

centrally supervised in future, while smaller banks will

remain under the supervision of national authorities.

Surprisingly, in May, German finance minister Wolfgang

Schäuble went public with a two-stage plan for the

further development of the banking union. In an arti-

cle published in the Financial Times he welcomed the

creation of a central supervisory authority at the ECB,

but opposed plans for a central resolution authority be-

cause it was not compatible with the European treaties

(Financial Times 15 May 2013). According to Schäuble,

the law allowed only a resolution mechanism based on

a network of national authorities and even then only if

three conditions were met: (i) the SSM must be estab-

lished and viable; (ii) common standards for resolution

mechanisms had to be agreed by means of a directive;

and (iii) capital adequacy requirements in accordance

with Basel III had to be complied with by EU banks. In

fact, Schäuble thereby opposed the outline of a proposal

for a regulation, already announced by the Commission,

on an integrated resolution mechanism (»we shall assess

it with an open mind«). The dispute entered a second

round after the publication of plans for the SRM by the

European Commission in July 2013 (European Commis-

sion 2013d). In a letter dated the day after publication,

written to Commissioner Michel Barnier, Schäuble points

out what he regarded as the considerable risks. The

proposal would ignore the legal, political and economic

realities. Because the SRM would be responsible only for

members of the euro zone the German finance minister

feared that it would have a divisive effect on the Single

Market and warned against endowing the Commission

with a central decision-making competence, in the event

of bank liquidations obliging Member States’ budgets to

seek financial assistance until a resolution fund was set

up. As an alternative, Schäuble revived his proposal for,

initially, the mere coordination of decentralised member

state resolution authorities (BMF 2013). In his answering

letter to the German minister Barnier defended the pro-

posed regulation and emphasised the value of the resolu-

tion mechanism for the Single Market as a whole and the

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BJÖRN HACKER | ON THE WAY TO A FISCAL OR A STABILITY UNION?

need for a central decision-making authority. However,

he acknowledged that this should be an independent

agency and not the Commission. He also referred to the

envisaged partial bail-in of shareholders and creditors

in the event of bank liquidation. Member state budgets

would only have to take a hit if other financial resources

were exhausted (European Commission 2013e). The

Commissioner referred to the European Council of June

2013, which had conceded that the completion of a

banking union within the current legislative period of

the European Parliament was a »top priority« (European

Council 2013b: 9).

3.3 Franco-German Plans

After consultations between Germany and France the

two governments published a position paper on 30 May

2013 entitled »Together for a Stronger Europe of Stability

and Growth«. With it, despite continuing disagreements

on their understanding of the EMU crisis and their eval-

uation of ways to overcome it, the two governments

fulfilled a promise made in January 2013, when they had

announced a contribution to the further development of

EMU in the run-up to the June summit of the European

Council. Besides a number of current aspects of the

efforts against youth unemployment and to promote

growth Merkel and Hollande took a position on the key

policy areas of the roadmap plans: with regard to banking

union they called for an agreement by the end of June

on the operational criteria of direct bank recapitalisation

and the conclusion of negotiations on the directives on

institutional restructuring and resolution, as well as on

deposit insurance. Despite Wolfgang Schäuble’s public

criticism of an integrated resolution mechanism its estab-

lishment by the end of the current European legislative

period was called for, although hedged as an »integrated

resolution board involving national resolution authorities

and allowing quick, effective and coherent decision-mak-

ing at the central level« (German Government 2013: 6).

With regard to the two Communications proposed by

the European Commission a two-step chronological

arrangement is laid down for future plans: thus consider-

ation has first to be given to whether there is a common

basic understanding in the euro zone of relevant factors

in closer economic-policy coordination and what specific

indicators and problem areas have to be discussed. For

example, possible policy areas are mentioned that in

future may have to be subjected to ex-ante coordination.

It is not difficult to guess, on the basis of known posi-

tions in the European Council bodies, which government

probably introduced which aspects. From Germany’s

standpoint the priority was certainly labour and prod-

uct markets, as well as external competitiveness; from

France’s standpoint it was the social dimension, including

pension policies and social inclusion, as well as the public

sector. Agreement had probably been reached on the

coordination of corporate taxation and education and

training systems. Concerning policy areas and indicators,

at the behest of France and Germany the heads of state

and government were to consult in autumn 2013. Thus

the adoption of a »roadmap« effectively failed at the

June summit.

Only in a second step, namely at the end of 2013 –

according to the Franco-German paper –, are the Member

States to address the key aspects of the instruments pro-

posed by the European Commission for convergence and

competitiveness, including the establishment of solidarity

mechanisms. It is emphasised that all euro zone Member

States are to be taken into consideration to allay France’s

fears of being pilloried as a result of this procedure

because of poor economic results. There is agreement

on the development of a solidarity mechanism based

on financial incentives, although the governments have

nothing more to add in the joint paper on what will be

done, to what extent, under what conditions and using

which resources. Similarly rudimentary remain the paper’s

concluding reflections on the institutional arrangement

of the European governance structure (German Gov-

ernment 2013: 9ff). The sole innovation here is the idea

of setting up structures within the European Parliament

dedicated specifically to the euro zone (for more details

see Roth 2011).

The Franco-German declaration nullified the original

time schedule of the December 2012 summit, which

envisaged a time-bound »roadmap« for implementing a

»genuine« EMU by June 2013. This can be attributed to

the long-drawn-out conflicts on banking union, the wait-

and-see attitude adopted in the run-up to the general

election in Germany in September 2013, but most of all

to the basic differences of opinion between the European

partners on the substance and orientation of individual

reform elements. The joint government paper cannot

gloss over the fact that the main line of conflict between

Germany and France remains in place. François Hollande

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BJÖRN HACKER | ON THE WAY TO A FISCAL OR A STABILITY UNION?

wants measures and procedures to boost investment and

strengthen the social dimension, while also continuing to

adhere to the original idea of a proper budget for the euro

zone to enable it to implement an anti-cyclical economic

policy. At the same time, he opposes a centralisation of

competences in Brussels on decision-making about re-

forms in the Member States. Angela Merkel, in contrast,

has never accepted the establishment of a fiscal capacity

to absorb imbalances in the euro zone and is ready at

most to give her assent to a low-threshold – in other

words, limited in terms of extent and duration – solidar-

ity mechanism in exchange for clearly defined structural

reforms (Euroactiv.de 1 July 2013). Incomparably more

important in Germany is to make existing recommenda-

tions in the European Semester more binding to increase

competitiveness.

3.4 Disappointment Arising from the June Summit 2013

Against this background of fundamental differences of

opinion on key policy areas the European Council was

unable to deliver at the summit on 27–28 June 2013

with regard to the planned agreement on a »roadmap«.

Herman van Rompuy updated the heads of state and

government concerning the current state of work and

consultations (Van Rompuy 2013). The original four

building blocks no longer provided a compass for a

»genuine« EMU, as had been the case one year previ-

ously (see Section 2.1); instead, he reported on the four

policy areas set out at the December 2012 summit.

First of all, the Council President detailed the social di-

mension of EMU, the only area in which, in the run-up

to the June summit, there were still no official proposals

and Communications. He acknowledged that rising un-

employment rates, resulting from the crisis management

adopted in many states, growing poverty and social

exclusion were undermining the EU’s economic potential

and social cohesion. Van Rompuy asserted that although

social policy would remain the province of the Member

States, the lack of cross-border coordination affects the

EMU’s functioning and stability. Furthermore, EMU’s basis

of legitimacy was under threat: »Indeed, high and persis-

tent levels of unemployment and social exclusion weaken

citizens’ support for the monetary union« (Van Rompuy

2013). He thus proposed that the procedure for eliminat-

ing macroeconomic imbalances should be furnished with

additional social indicators; a scoreboard for social affairs

and employment should be implemented for economic

monitoring in the European Semester; and coordination

of social and employment policy in the sense of social

investment (on this see European Commission 2013f)

should be improved.

With regard to ex-ante coordination of economic-pol-

icy reform plans they were not merely to concern the

efficiency of labour, product and services markets,

but also the public sector, tax systems, education and

training systems, pension and health care systems and

the investment climate and social inclusion. The policy

areas listed for enhanced economic-policy coordination

should also be reflected in the contractual arrangements,

in that measures on improving efficiency should be

agreed between the EU and individual Member States.

The focus, however, should be on identifying structural

deficits on labour, product and services markets. There

was constant talk of »pacts for competitiveness, growth

and employment«. The Franco-German proposal of ob-

ligatory conclusion of such pacts for all euro-states, with

voluntary participation by all EU countries was accepted.

As a decisive reason for the introduction of partnerships

it was alleged that »[i]ndeed, there is a gap between

the recommended course of policy actions set out in the

context of the European Semester and their actual imple-

mentation at the level of Member States« (Van Rompuy

2013: 6). Ex-ante coordination was to be embedded in

the European Semester and the contractual arrange-

ments would heighten its recommendations. For both

instruments the importance of national identification

and responsibility was emphasised and, accordingly, the

role of national parliaments and the social partners was

highlighted. The social dimension was also to be taken

into consideration with regard to the two instruments.

The European Parliament was to be involved only in the

contractual arrangements.

With regard to probably the most controversial issue, the

solidarity mechanism, the possible problem of »moral

hazard« was addressed and the German line of a targeted,

strictly conditional instrument that was time-bound and

limited in extent was repeated. Financial support was to

be available, accordingly, only to states that otherwise

would be unable to fund the agreed structural reforms.

The affected member state was also to commit itself to

a time-bound implementation of individual measures;

failing that, the financial support would be withdrawn.

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BJÖRN HACKER | ON THE WAY TO A FISCAL OR A STABILITY UNION?

Surprisingly and without precedent Van Rompuy backed

away from the idea of financial transfers or subsidies in

his Report, stressing the benefits of financial support on

the basis of loans. This would avoid putting pressure on

the budgets of individual Member States, support would

be provided in the decisive initial phase of growth-gen-

erating reforms and the condition of repayment of loans

would increase the pressure – which would be greater

than in the case of subsidies – for national responsibility

within the meaning of the intended incentive structure

(Van Rompuy 2013: 7f).

Thus the various aspects of the interim results of work

on the »genuine« EMU are not reflected in detail in the

conclusions of the European Council. Based on the points

of consensus available so far the Commission would like

to expand its Communication on ex-ante coordination

into a concrete proposal by autumn 2013 and submit

the pending Communication on the social dimension of

EMU. With regard to the contractual arrangements and

the solidarity mechanism there is talk of a convergence of

positions among the heads of state and government, but

at the same time it is emphasised that »further work is re-

quired on these issues in the coming months« (European

Council 2013b: 11). Clearly, agreement has been reached

on strengthening EMU’s social dimension. In comparison

to the document presented by Van Rompuy, however,

it does not speak of new indicators but of supervision

and coordination of social and employment policies. The

role of the social partners and the social dialogue on the

subject is emphasised.

As far as further work planning is concerned, the Fran-

co-German proposal of a division will be complied with:

thus the October summit will address the basic under-

standing on joint indicators and policy areas for stronger

coordination of economic policy, as well as EMU’s social

dimension. Only the December summit is to take deci-

sions on this and on this basis also to establish the first

features of the contractual agreements and the solidarity

mechanism (European Council 2013b: 11).

3.5 Postponements prior to the December Summit 2013

On October 2, 2013 the European Commission launched

its long-awaited communication on the social dimension

of EMU (European Commission 2013g). Similar to the

proposals made by Van Rompuy in his updated report

at the June summit, the Commission highlights that a

functioning EMU must be able to tackle »problematic de-

velopments« related to social and employment policies.

Therefore, additional indicators shall be integrated in the

existing macroeconomic imbalance procedure as well as

in a completely new »social scoreboard«. It is proposed

that indicators like the long-term unemployment ratio,

youth unemployment rate, real gross disposable income

of households and the S80/20 ratio measuring inequality

feed into the European Semester. »The employment and

social indicators for the scoreboard should capture the

key phenomena for each country and identify the most

serious problems and developments at an early stage

and before the country diverges too strongly from its

past performance or the rest of the EU« (European Com-

mission 2013g: 6f). But since no targets are set, it is pri-

marily an exchange of best practices and performances

within the meaning of the Open Method of Coordination

(OMC). Besides the introduction of social indicator, the

Commission wants to encourage labour mobility and

social dialogue should be strengthened on a European

level. In contrast, automatic stabilizers to offset asym-

metric shocks in EMU, such as European unemployment

insurance, are not pursued, since this would go beyond

the current competences of the EU and would require

substantial amendments of the treaties in the opinion of

the Commission. The communication is still in favor of

an insurance system to absorb macroeconomic shocks

and reaffirms the ideas developed in the »Blueprint«.

However, the introduction of any kind of fiscal capacity

is shifted to the far future.

»Shifting things to the future« could have been as well

the slogan of the European Council in October 2013.

The planned first step of discussing the relevant policy

fields and indicators for stronger European coordination

was postponed to the December summit. It is more than

questionable, whether the heads of state and govern-

ment will then find the time to decide on step two of

the agenda, to take decisions on the CCI. In the field

of the social dimension, Member States welcomed the

Commission’s proposal and plan to decide on a range of

indicators already in December in order to use them for

the European Semester in 2014. It is important to note

that the conclusions of the European Council speak of

an employment and social scoreboard »in the Joint Em-

ployment Report«, like mentioned in the Commission’s

communication, but they do not explicitly refer to the

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BJÖRN HACKER | ON THE WAY TO A FISCAL OR A STABILITY UNION?

idea of enhancing the MIP procedure by auxiliary employ-

ment and social indicators (European Council 2013c: 14).

On the banking union, the October summit was silent as

well. For 2014 a stress test by the ECB was announced.

This served as the background to recall the urgency

to find final agreements on the controversial issues of

guidelines for a direct recapitalisation by the ESM, the

Single Resolution Mechanism and the Bank Recovery and

Resolution Directive by the end of the year.

4. Critical Evaluation of the Reform Plans

If one compares the proposals discussed at the June

2013 summit with the four building blocks for restruc-

turing EMU put forward by the four presidents, little

has remained of the attempt to eliminate the systemic

deficiencies of the Maastricht EMU construction.

No progress can be discerned in the current plans with

regard to the often mentioned need for common debt

management of the euro zone, better coordination of tax

policies and the strengthening of democratic legitimacy.

While the debt repayment fund and Eurobonds have also

fallen out of the debate, together with a fiscal capacity

to absorb economic shocks in specific countries, intense

work is on-going on new control instruments by means of

an ex-ante coordination of economic-policy reforms and

contractual arrangements. The line of conflict between

supporters of a fiscal union and of a »stability union«

is clear.1 The closely intertwined issues of Community

liability and national sovereignty form the lynchpin of a

growing controversy, which affects everything that we

shall examine in what follows.

4.1 Banking Union

Initially, the clearest progress at the European level can be

discerned in the creation of an integrated financial frame-

work, the banking union. The agreement on a European

supervisory mechanism and the build-up of the European

Banking Authority (EBA) at times gave cause for opti-

mism that even the complicated issues of restructuring

and resolution, as well as deposit guarantees could be

1. Ansgar Belke (2013) derives from this a widening gap between north-ern and southern Europe.

dealt with at the latest by the June summit. This did not

come to pass, however. After the German government

strongly advocated the rapid introduction of a banking

union in summer 2012, it applied the brakes, since when

the project started to make progress in real terms.

Germany’s opposition to any kind of joint liability is well

known. The crisis is interpreted primarily as the budget-

ary policy failures of individual countries. The transient

swerve towards agreement to an integrated financial

framework can be explained only in terms of the in-

creasing pressure of the European partners to consent

to a Community liability going beyond state aid via loans

from the EFSF and ESM safety nets. This was in response

particularly to the Spanish banking crisis, Italy’s refinanc-

ing problems and the new French President’s advocacy

of Eurobonds. For Angela Merkel agreement with the

European partners in the banking union was easier to

sell in the coalition supporting her than entry into joint

debt management (Financial Times Deutschland 14 June

2012). Furthermore, the German government went on

the defensive at the June 2012 summit because the

domestic opposition parties the SPD and the Greens

had made their agreement to the ESM (necessary for a

two-thirds majority) in the Bundestag and the Bundesrat

dependent on Merkel’s successful advocacy of a growth

and employment pact in Brussels. Italy’s Prime Minister

Mario Monti and Spanish Prime Minister Mariano Rajoy,

with the support of France’s new government at the

summit meeting, used this to make Merkel’s urgently

needed domestic success dependent on concessions on

access to EFSF and ESM funds (The European 29 June

2012). Thus a recapitalisation of Spanish banks by the

EFSF became possible and, most likely, the joint position

of the euro-states on the prospect of recapitalising banks

by the ESM: »When an effective single supervisory mech-

anism is established, involving the ECB, for banks in the

euro area the ESM could, following a regular decision,

have the possibility to recapitalize banks directly« (Euro

Summit 2012: 1).

Against this background it can also be explained why

the German finance minister has tried to play for time

when it comes to the banking union. Even the common

banking supervision, originally planned for the beginning

of January 2013, was postponed due to the stubborn

intervention of the German government in Brussels in

summer 2013. German Chancellor Merkel cosied up

with French President François Hollande at the European

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BJÖRN HACKER | ON THE WAY TO A FISCAL OR A STABILITY UNION?

Council in October 2012 and adhered to the principle

»better safe than sorry« (»Gründlichkeit vor Schnellig-

keit« – Der Spiegel Online 19 October 2012). Schäuble’s

two-stage plan presented in May 2013 for a European

resolution mechanism and his objections to the corre-

sponding Commission plan put off the banking union

well into the future. The first building block of the vision

of a »genuine« EMU was not integrated into the four key

policy areas for the »roadmap« at the December summit

of the European Council in 2012, perhaps because the

heads of state and government believed they had already

almost achieved the goal of successful agreements on

the integrated financial framework. The attitude of the

German government shows, however, how fragile the

June 2012 compromise on the banking union is. This is

dramatic because the integrated financial framework as

a first step is a necessary condition for overcoming the

crisis (Véron 2012) in order to break the vicious circle

of bank bailouts, sovereign debt and refinancing costs.

Plans for a common resolution fund provided by the

banks themselves will not be enough in the short-term,

as such a project takes several years. Already for 2014,

the ECB has announced to conduct a stress test for banks

across the EU. No doubt, if you enable a common super-

vision, you should be featured as well with a common

resolution mechanism ready by the time, bad loans and

toxic assets might be detected.

4.2 Economic-policy Coordination

Ex-ante coordination of major economic-policy reform

plans represents a proposal for the creation of an in-

tegrated economic-policy framework that is worthy of

discussion, which would extend the existing European

Semester from budgetary-policy coordination to general

economic policy. However, at the outset of evaluations

of the »genuine« EMU a quite different focus was estab-

lished. Thus the first Quadriga Report for the June 2012

summit talks of labour mobility and tax coordination and

puts the emphasis of an amended economic-policy gov-

ernance on the introduction of joint debt management

and a fiscal capacity. Only after protests from Germany,

Finland, the Netherlands and a number of other states

against entry into a liability union did Van Rompuy’s In-

terim Report talk of »ex-ante coordination« of structural

reforms and a central »macro-oversight« (Van Rompuy

2012b). With reference to Article 11 of the Fiscal Com-

pact, which already calls for the ex-ante coordination of

economic-policy reform plans, it finds itself central to

stage 1, to be implemented by the end of 2013, in the

second Quadriga Report of December 2012 (Van Rompuy

2012c: 4, 13). Even the European Commission would like

to implement ex-ante coordination quickly, although in

its blueprint it links it closely to a fiscal capacity (European

Commission 2012a: 17f, 32). This link was later dropped

when a group of states around Germany reinterpreted a

separate budget for the euro zone to mean a solidarity

mechanism for successful structural reforms.

The cross-border externalities of reforms implemented

by individual states in an economic and monetary un-

ion have undoubtedly been underestimated in the euro

zone so far. However, it is difficult to imagine a central

planning body in Brussels that, in all good faith, could

scrutinise and balance the reform plans of 17 countries

in such a way that a common European interest could

arise from the process, and one that at the same time did

not run counter to legitimate national decision-making.

It remains unclear on what basis reform plans would be

evaluated. If – as might be expected – the existing sys-

tem of fiscal and macroeconomic supervision were taken

as the measure we can be sure that state budgetary

restrictions and a fixation on price competition would

predominate. The European Semester already has these

features, dominated by an imbalance between consolida-

tion requirements arising from the tightened up Stability

and Growth Pact and the employment and social policy

goals of the Europe 2020 Strategy, such as an asymmetric

approach to current account imbalances in favour of sur-

plus countries within the framework of macroeconomic

supervision (Degryse 2012; Hacker 2013b).

Generally, it would also have to be decided what kind

of economic-policy reform counts as »important« or

»major« and who is authorised to make such a classifi-

cation. The Commission’s Communication on this issue

remains relatively modest, with its reference to policy

areas requiring ex-ante coordination, namely reforms

of product, labour and services markets, taxation and

financial markets, not to mention fairly convoluted in

the area of political economy (European Commission

2013a: 3f). The dispute between France and Germany –

each representing a group of countries – concerning the

right course of action to deepen the EMU has led, since

mid-2013, to a certain overdetermination of ex-ante

coordination, under the aegis of which general reforms

in the public sector, education and training systems,

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BJÖRN HACKER | ON THE WAY TO A FISCAL OR A STABILITY UNION?

pension and health care systems and the areas of invest-

ment climate and social inclusion are now also supposed

to belong (Van Rompuy 2013).

France, Italy, Belgium and Austria in particular are calling

for social and education policies to be more closely co-

ordinated at European level. However, the governments

of these countries link this to their notion of a distinct

social dimension of EMU beyond the fixation on compet-

itiveness and structural reforms and, at the same time,

have not given up their demand for a fiscal capacity in a

position to transfer funding. This is diametrically opposed

to the views of Germany, the Netherlands and some

northern and eastern European states that regard ex-ante

coordination as an instrument for setting out structural

reforms to boost competitiveness along the lines of the

approach to the crisis pursued thus far. France’s acknowl-

edged interest in integrating virtually all national reform

projects in a European coordination cycle will boomerang

if – as is already the case in the European Semester – in

the process of defining indicators and targets budgetary

considerations become the dominant consideration.

4.3 Contractual Arrangements

Because the European Council and the European Com-

mission no longer really believe in voluntary commitments

within the framework of open policy coordination con-

tractual arrangements are under discussion as a possible

way of increasing member state commitments. Both the

second Quadriga Report and the Commission’s Blueprint

refer to direct contractual arrangements between Mem-

ber States and the EU, while the Communication on

the Convergence and Competitiveness Instrument (CCI)

goes into more detail. This is supposed to offer a way

out of the alleged transposition deficit affecting policy

recommendations beyond the regulatory level. In the

background here are the unpleasant experiences with

Member States’ failing to comply with common regu-

lations or to heed targets and recommendations made

by EU bodies. Jörg Asmussen, executive board member

of the ECB bemoaned recently, that only ten per cent of

the country-specific recommendations in the European

Semester are implemented by the Member States (Der

Spiegel Online 27 October 2013).

There was no talk of contractual arrangements at the

outset of the reform process to restructure EMU. Only the

reluctance of the group of states around Germany with

regard to every aspect of joint liability subsequent to the

June summit in 2012 and its simultaneous advocacy of

improved control mechanisms and commitments to struc-

tural reforms have made this idea a central consideration.

In both the Commission’s Blueprint and the Quadriga

Report of December 2012 contractual arrangements,

which are supposed to be implemented in 2014, are still

closely tied to the establishment of a fiscal capacity. This

is intended to provide states with financial support in

implementing bilaterally agreed reform projects (Euro-

pean Commission 2012a: 25f): »The implementation of

contractual arrangements and the associated incentives

would support a convergence process, leading in stage 3

to the establishment of a fiscal capacity to facilitate ad-

justment to economic shocks« (Van Rompuy 2012c: 9).

This cleavage, on one hand, runs parallel with the one

related to ex-ante coordination concerning the issues

to be included, while on the other hand a new cleavage

has arisen around the question of transferring national

sovereignty or establishing it more firmly within the

European framework. France in particular is against the

Commission being given too strong a role; according to

President Hollande, the influence and reform demands

of Brussels with regard to member state policies already

go too far in the European Semester (The Telegraph

29 May 2013). This contradicts the demand orchestrated

by France that new processes should not be confined to

structural reforms to improve competitiveness on mar-

kets for products, labour and services. The broadest pos-

sible spectrum of policy areas is thus desired, but more

binding agreements are rejected. Germany, by contrast,

is very much in favour of tightening up reform obliga-

tions by means of bilateral agreements between the EU

and individual states. Besides France, many northern and

eastern European states are sceptical of a stronger role

for the Commission, for example, as laid down in the

Blueprint and the Communication on the Convergence

and Competitiveness Instrument.

It must be asked whether the »naming, shaming and

blaming« of the Stability and Growth Pact’s open co-

ordination instruments, the Lisbon Strategy and its Open

Method of Coordination and economic and employment

policy guidelines, and the Europe 2020 Strategy within

the framework of the European Semester have really had

little effect on member state policymaking. Although

scholars bemoan the fact that in particular in the area of

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BJÖRN HACKER | ON THE WAY TO A FISCAL OR A STABILITY UNION?

European employment and social policy one might have

hoped for more from the formulation of common objec-

tives it has to be said that substantial policy approaches

have been rolled out with the help of European govern-

ance instruments in all Member States. This applies, for

example, to the concept of flexicurity in labour market

policy, the three-pillar pension system in policy on provi-

sion for old age and new ideas on avoiding and reducing

poverty and social exclusion. As a rule, the closer »soft«

coordination mechanisms come to the realm of »hard«

European legislation the more teeth they acquire (Hacker

2010: 349ff). This applies in particular to the Stability

and Growth Pact, which is closely bound up with EMU,

whose criteria over time have by no means always been

undermined. Before the outbreak of the global financial

crisis the average budget deficit in the euro zone stood

at only 0.7 per cent (in 2007) and thus was well within

the framework of the 3 per cent criterion. In the same

year before the crisis the average debt level also remained

around a relatively low level of 66.4 per cent of euro zone

GDP (Eurostat 2013). However, if European governance

instruments were relatively effective in normal times are

direct contractual arrangements worth the effort?

The interesting thing about contractual arrangements is

the inherent opportunity they provide to abandon the

»one-size-fits-all« strategy pursued in European policy

coordination hitherto in favour of more customised

policy orientations and recommendations. Too often in

the past it has turned out that planning in Brussels has

taken little account of conditions on the ground in the

target countries. This is particularly so in the crisis when

consolidation requirements have ignored the economic

performance of the affected countries. This is apparent

in, for example, disrupted economic cycles in Portugal

and Greece which could not cope with the one-sided re-

quirements of austerity policy, although Ireland has fared

better. In Greece in particular the crisis would probably

have been alleviated if, instead of programmes of across-

the-board cuts they had concentrated on overhauling the

ramshackle tax and contribution systems. The unfocused

gaze of European target agreements on the diverse socio-

economic circumstances in the EU always risks damaging

developed institutional paths in the Member States. A

strong private pension pillar, for example, is susceptible to

this, because it is not required to take account of existing

pension arrangements. It has long been pointed out that

when setting European goals the varieties of capitalism or

the different kinds of welfare state should be taken into

account (Scharpf 2002: 660ff). The CCI could achieve

this, although there is the danger that a country-specific

focus might lead to fragmentation. It would be better to

form country groups on a socioeconomic and institutional

basis, with cluster-specific goals.

The legal basis of contractual arrangements remains

unclear. Will they go further than recommendations and

be actionable before the ECJ? Furthermore, on what

economic- policy basis will the agreements be con-

cluded? As already mentioned with regard to ex-ante

coordination there is a danger that the dominance of

budgetary-policy consolidation pressures will be used to

make direct contractual arrangements into a platform of

»austerity for all« Member States in the euro zone.

4.4 Fiscal Capacity

Nothing more has been said since the December summit

of 2012 about an independent fiscal capacity for the

euro zone, which would be needed to absorb asymmetric

economic shocks in individual Member States. More than

any of the other instruments that have been discussed

this long overdue desideratum would be capable of com-

pleting EMU’s unfinished architecture. It is a long-stand-

ing cause for complaint that ECB monetary policy and

member-state wage policy bear the whole burden of

dealing with asymmetric shocks in the euro zone. In

contrast to the United States there is nothing in EMU to

counterbalance monetary policy at the Community level,

which shapes macroeconomic policy. Only a system of

financial transfers that absorbs regional economic shocks

by means of a central budget could overcome the current

fragility of the euro zone (De Grauwe 2006). A common

budget for the Monetary Union represents the »missing

link« needed to enable considerable progress to be made

towards a fiscal union (Rodrigues 2013).2

The Quadriga Report of December 2012 and the Com-

mission’s Blueprint lay out in detail the need and utility

of a fiscal capacity, proposing as a possible model for its

implementation the establishment of a European unem-

ployment insurance. Preliminary work has already been

done on this, which would only have to be resumed

2. Several models of a transnational fiscal equalisation and stabilisation mechanism exist, which need not take the form of a European budget. For an overview, see Pisany-Ferry et al. (2013) and Deutsche Bank Re-search (2013).

16

BJÖRN HACKER | ON THE WAY TO A FISCAL OR A STABILITY UNION?

(Dullien 2008; Dullien / Fichtner 2013). However, the ad-

vocates of a »stability union« clustered around Germany

would find such a mechanism objectionable because it

would involve real financial transfers between the EMU

Member States. Similar to the initially very open plans for

Community bonds via a debt repayment fund, eurobills

and Eurobonds, after the European Council meeting of

December 2012 a fiscal capacity is not to be found in

further documents on a »genuine« EMU.

The so-called solidarity mechanism that has taken its place

represents a much more modest attempt at cross-border

financial policy, in terms of both scope and function.

Naturally, it can be considered to be the nucleus of a fiscal

capacity along the lines of a separate budget for the euro

zone that may come into being at a later date. But this

should be clearly specified and envisaged as a real pros-

pect, as demonstrated by the second Quadriga Report and

the Commission’s Blueprint. In its current description in

the Commission’s Communication on CCI of March 2013

it appears to be no more than a means of rewarding neo-

liberal structural reforms. The only interesting thing about

it is the newly formulated approach to financial support as

an incentive for certain member-state policies that breaks

with the sanction-based approach pursued hitherto. There

can be no hope of macro-governance on this basis, how-

ever. And if the bases of the solidarity mechanism are to

be found in the abovementioned instruments of ex-ante

coordination and contractual arrangements the Member

States would in addition be rewarded for using political

economy solely for the purpose of budget consolidation

and boosting competitiveness.

Instead of concentrating on the reforms needed to

deepen EMU and on working out possible forms of fiscal

capacity and its political and legal feasibility the heads of

state and government are arguing about possible issues

of moral hazard involved in offering financial »rewards«.

This is despite the fact that a relatively modest sum of

10–20 billion euros is in question (European unemploy-

ment insurance would require three times as much), and

in every document on the subject the strict conditions

governing access to and the scope and duration of indi-

vidual payments are emphasised. This led to the absurd

proposal in Van Rompuy’s Interim Report of June 2013

to forgo financial transfers and replace them by loans for

the start-up funding of structural reforms. In contrast to

earlier versions (see Van Rompuy 2012b: 5) the differ-

ence from the European Stability Mechanism would be

suspended. Thus the idea of a euro zone budget would

be dead and buried, at least for the time being.

4.5 Democratic Legitimation

The ideas put forward so far on strengthening demo-

cratic legitimation with regard to the plethora of new

procedures and instruments of economic governance

can be considered very rudimentary. The European Coun-

cil’s summit declarations are limited to calling for closer

cooperation between the European and national parlia-

ments and thus merely repeat corresponding passages

from the Fiscal Compact or Protocol I of the Treaties:

The establishment of an interparliamentary conference is

under consideration. The European Commission takes a

different view, making clear in its chapter on political un-

ion in the Blueprint that although cooperation between

parliaments would be welcome it would not ensure the

democratic legitimacy of EU decisions: »That requires

a parliamentary assembly representatively composed in

which votes can be taken. The European Parliament, and

only it, is that assembly for the EU and hence for the

euro« (European Commission 2012a: 35).

The Blueprint provides some – also implementable in the

short term and without a Treaty amendment – sound

advice on strengthening democratic legitimation within

the framework of the newly emerging EU economic

governance, which to date have not been addressed

in further detail. They all seem to move in the direction

of boosting the European Parliament’s information and

consultation options within the framework of the Euro-

pean Semester (European Commission 2012a: 42f). Why

this has yet to progress beyond the level of theoretical

announcements remains to be seen. No one is preventing

the Commission and the Council from involving the Euro-

pean Parliament more closely in the European Semester.

All of the proposals on institutional adaptation by way

of Treaty changes submitted by the Commission basi-

cally envisage a strengthening of the Eurogroup within

formations of the Council, in the Commission by means

of an EMU financial administration and in the person of

a vice-president responsible for the euro, as well as in

the European Parliament through the establishment of

a »euro committee« whose authority would exceed that

of other committees. The Franco-German paper also puts

forward ideas on separate euro zone structures within

the European Parliament.

17

BJÖRN HACKER | ON THE WAY TO A FISCAL OR A STABILITY UNION?

Already in the first Quadriga Report of June 2012 the

aspect dealt with last – democratic legitimation and

accountability – feels like merely going through the

motions. The formulas familiar to readers of European

documents concerning the importance of involving par-

liaments and the social partners are woolly compared to

the detailed formulas on expansion of technical powers

and competences of the Commission and the Council.

In fact, both national parliaments and the European Par-

liament are becoming increasingly marginalised within

the framework of the new governance structures. In the

plans for a »genuine« EMU reference is made to the

need to involve the European Parliament only within the

framework of contractual arrangements (Van Rompuy

2013: 6); nothing of the kind is mentioned with regard

to ex-ante coordination and the solidarity instrument.

And when it comes to including national parliaments the

increasingly used formula »national ownership« of the

intensity of structural reform sounds rather derisory and

is not accompanied by any concrete proposal on solving

the growing democratic deficit (Van Rompuy 2013: 6). It

is becoming very clear that the focus of deliberations on

EMU reform is of a functional and technocratic nature.

4.6 Social dimension of EMU

It was French President François Hollande, who helped

the suffering states in the south of Europe to have a voice

with their complaints about the negative social conse-

quences of the dominant austerity course. Whilst the cri-

sis management led by Germany, reacting to increasing

levels of unemployment and exploding youth unemploy-

ment rates, consisted of higher labour market flexibility

and mobility, the discontent of austerity was taken seri-

ously on a European level since the French government

convinced its partners to include the »social dimension«

as one of the four columns of EMU reform projects at the

European Council in December 2012 (European Council

2012c: 4). Socialist parties and trade unions all over

Europe focused politically on the unprecedented high

levels of unemployment among young people in several

European States and have been successful in increasing

the public awareness for the social consequences of the

crisis course so far.3

3. The Party of European Socialists (PES) carried out a huge pan-Euro-pean campaign for a »European Youth Guarantee«, see http://www.youth- guarantee.eu.

This was helpful in forcing the heads of state and gov-

ernment to implement an immediate action programme

to decrease youth unemployment rates of over 50 per

cent, like in Greece and Spain, in the first half of 2013. Its

main elements are a »Youth Guarantee« to bring young

people back to work or into education or training within

four months and a »Youth Employment Initiative« of

six billion euros, reallocated in the communities budget

for investment and mobility schemes (European Council

2013b).

Nevertheless, the progress beyond this action plan is

rather modest. The communication of the Commission

on the social dimension of EMU was awaited for a long

time and when it was published in October 2013, it dis-

appointed all people who hoped for a broader approach.

Expectations have been high throughout the year 2013,

especially after a »Non-paper«, possibly written by DG

EMPL, was handed around in Brussels and the member

States’ capitals in spring, proposing reinforced social

coordination and surveillance through a scoreboard of

employment and social indicators with minimum social

standards4 or national floors. Featured with objectives

and benchmarks, nearly the whole economic governance

framework of EMU is mirrored by a social governance

attempt to tackle social imbalances, to enable a social

impact analysis and to increase the power of social actors

in EMU, namely the EPSCO ministers, the social partners

and the European Parliament. Moreover, the »Non-pa-

per« takes the social divergences of EMU as a potential

threat to its functioning and surviving and argues for this

reason to extend the planned contractual arrangements

with a social domain as a first step to build up an auto-

matic stabiliser function with a common fiscal capacity

(Non-paper 2013).

Only few elements of these useful ideas to establish a

true European Social Model survived in the Van Rompuy

update report of June 2013 and the Commission’s com-

munication. Auxiliary social indicators are welcomed, but

they should have no consequences with regard to the

economic governance process. Although it is proposed

by the Commission to use these indicators not only in

the European Semester but as well in the MIP, no objec-

tives, thresholds or minimum standards are envisaged

(European Commission 2013g). And even this toothless

4. Besides a youth guarantee, a minimum duration and minimum re-placement rates of unemployment benefits, a minimum income and a minimum wage are suggested among other objectives.

18

BJÖRN HACKER | ON THE WAY TO A FISCAL OR A STABILITY UNION?

approach was contested by the German government

in autumn 2013 with the argument that structural and

competitiveness reforms should not be deranged by a

social dimension.

As a majority of Member States is in favour of new in-

itiatives to tackle social imbalances in EMU, it is likely

that a social scoreboard will be implemented and used

in the European Semester in 2014. Due to the protest of

the German interim government this will, however, not

amount to a change of the biased policy approach in the

crisis management (Hacker 2013b).

5. Starting Out like a Tiger, Ending Up as a Bedside Rug: The »Genuine« EMU Will

Not Be a Fiscal Union

Although the critics of the Maastricht Treaty, who called

attention to the risks of monetary integration without

fiscal and political integration, long went unheeded, the

current crisis has reopened the debate on the structure

of EMU. At least, there is – and this is confirmed by the

process concerning a »genuine« EMU – a debate on the

shortcomings of the architecture of the Monetary Union.

Even five years ago it would have been unimaginable to

read about demands for Eurobonds, a common budget

or a banking union in key EU papers. And even in the

face of the disastrous consequences of austerity policy

the always merely hesitant discussion of Europe’s social

dimension is gathering momentum again, albeit haltingly.

The EMU crisis unexpectedly offers, in the face of the

possible collapse of the common currency, an oppor-

tunity to deepen integration through a banking union,

fiscal capacity, common debt management and a social

union. It is clear that this would be accompanied by more

common regulations, tightened controls and the transfer

of national sovereignty to supranational level. Equally,

this path of further deepening can be pursued only if

there is also the impetus of democratic legitimation with

regard to the relevant decision-making. This is as clear

in the first plans drawn up by the four presidents in

June 2012 as in the revised version of December 2012

and the Commission’s Blueprint.

The course of the lines of conflict and discussions con-

cerning »genuine monetary union« laid out in this paper

demonstrates the dangers of the process, however.

Within only a few months the proponents of a »stability

union«, who are counting on a continuation of the uni-

lateral course of budgetary controls and competitiveness,

have been able to dismiss, marginalise or put on the

backburner what is compelling about a fiscal union, as

well as the opportunities it would offer. Again and again,

specific proposals for improving the EMU architecture

founder on fundamentally divergent approaches to the

question of joint liability between Member States. That

applies both to the controversy about the restructuring

and resolution mechanism of the banking union and to

plans for common debt management or a fiscal capacity

for the euro zone.

All that remains is the technocratic elements for gradual

adjustments of the existing governance structure. And

because, with the European Semester, the Fiscal Com-

pact and other instruments, this is out of kilter (Busch

2012; Hacker 2013b) a reshaping of what is already in

place constitutes the lowest common denominator of

Member States. First and foremost, this means: structural

reforms, budgetary consolidation, tightened controls and

sanctions. The elements of ex-ante coordination of eco-

nomic-policy reforms, direct contractual arrangements

between each member state and the EU and financial

rewards for faithfully implementing structural reforms

by means of a solidarity instrument, which remain for

a »genuine« EMU are basically already part of the co-

ordination cycle of the European Semester or at least

imaginable. Now the range of subjects of coordination is

to be extended and the bindingness of common objec-

tives is to be tightened up. Anything beyond that, which

could really contribute to change capable of correcting

the barely discussed bias in EU economic governance, is

scarcely discernible. And the urgently needed project of a

banking union will never come to fruition unless progress

is made in fiscal and political integration (Véron 2013: 6).

The German government has been enormously success-

ful in Brussels, suppressing almost everything that does

not conform with its model of a »stability union«, in

which each state helps itself and thus a transnational

community cannot emerge. Thus the fiscal capacity has

been remodelled into the unambitious solidarity mech-

anism; the banking union is coming to grief or largely

degenerating into mere routine coordination by national

authorities; and Community bonds have become a dead

letter. On the latter, the Commission even produced

a green book in 2011 (European Commission 2011).

19

BJÖRN HACKER | ON THE WAY TO A FISCAL OR A STABILITY UNION?

However, at the latest since Chancellor Merkel made her

position absolutely clear around the time of the European

Council in June 2011 (»No Eurobonds as long as I live«)

the topic has been taboo.

Since the change of government in France the support-

ers of a »stability union« around Germany, Finland and

the Netherlands have encountered stiffer opposition.

This is due to the obvious failure of austerity policy, the

altered power constellations as a result of changes of

government and the opportunity sensed by the European

institutions to expand their competences far beyond the

budget policy framework. The attempt by the French

government, together with representatives of the Euro-

pean Commission, to shoehorn the social dimension –

which was not mentioned until the December summit of

2012 – into the negotiations on the »genuine« EMU is

commendable and, in principle, correct. The EU has for

too long been perceived solely as a common economic

area and positive, market-shaping integration has fallen

too far behind negative, market-creating integration

(Höpner / Schäfer 2010). It is thus high time to bolster

and further develop the European Social Model. How-

ever, this process will miscarry if there is not also a clear

correction of the reparation mode that EMU has pursued

thus far.

As long as austerity policy remains dominant, sovereign

debt problems retain the focus of attention as against

macroeconomic imbalances and the European Semes-

ter shows a neoliberal bias, the augmentation and

upgrading of the social dimension with regard to EU

coordination policy will be rather a hindrance than a

help. Although there are already forward-looking plans

to incorporate the social into the European Semester,

such as the upgrading of the EPSCO Council as against

the ECOFIN Council or the establishment of a score-

board of social indicators (Van Rompuy 2013: 2f; Euro-

pean Commission 2013g), instruments and objectives

(Bsirske / Busch 2013), as things stand today and with

the current alignment of the instruments of economic

governance all social aspects will remain in the shadow

of budgetary consolidation and measures to increase

competitiveness. The measures presented and discussed

here, such as ex-ante coordination and contractual ar-

rangements, would only exacerbate the dependency of

progress in the social realm on financial conditions (Daly

2012: 283), thus forcing it to justify itself and cement-

ing the hierarchical subordination of social policy. This

impression is strengthened with a look on the Commis-

sions’ Communication on the social dimension of EMU

in October 2013. Although the monitoring of new social

and employment policy indicators is recommended, it

shall be ensured at the same time that these indicators do

not influence the country-specific recommendations and

sanction-based fiscal coordination. In the Press Memo

for this Communication, the Commission responds to

the question of possible consequences if a Member State

would violate the indicators of the newly proposed social

scoreboard: »There will be no automatic consequences.

The scoreboard is an analytical tool to observe divergence

from historical trends or from the EU average« (European

Commission 2013h).

The work-in-progress of the European Social Model can

continue successfully only if the original plans for a fiscal

capacity, common debt management and a completely

integrated banking union are realised. Only the con-

sistent correction of the defective Maastricht currency

architecture (see, for example, Hacker 2011; Busch 2012)

can clear the way for Europe’s social dimension. Unfortu-

nately, there appears to be no prospect of that at present.

20

BJÖRN HACKER | ON THE WAY TO A FISCAL OR A STABILITY UNION?

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BJÖRN HACKER | ON THE WAY TO A FISCAL OR A STABILITY UNION?

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The views expressed in this publication are not necessarilythose of the Friedrich-Ebert-Stiftung or of the organization forwhich the author works.

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International Policy Analysis (IPA) is the analytical unit of the Friedrich-Ebert-Stiftung’s department of International Dialogue. In our publications and studies we address key issues of European and international politics, economics and society. Our aim is to develop recommendations for policy action and scenarios from a Social Democratic perspective.

This publication appears within the framework of our project »European Economic and Social Policy«.Editor: Dr Björn Hacker, bjoern.hacker@fes.de; Asisstant Editor: Nora Neye, nora.neye@fes.de.

ISBN 978-3-86498-746-5

About the author

Dr Björn Hacker is political analyst on European economic and social policy at the Friedrich-Ebert-Stiftung.